Bureaucracy

The last century saw the perfection of the bureaucracy -- a form of organization that has been enormously
successful and is the result of thousands of years of trial and error evolution. Max Weber outlined the key
characteristics of a bureaucracy:

1. specification of jobs with detailed rights, obligations, responsibilities, scope of authority

2. system of supervision and subordination
3. unity of command
4. extensive use of written documents
5. training in job requirements and skills
6. application of consistent and complete rules (company manual)
7. assign work and hire personnel based on competence and experience

Today, many of these principles seem obvious and commonplace. However, they are all inventions ---
organizations did not always have these features.

Today we also think of bureaucracies as inefficient, slow and generally bad. In Weber's time, they were seen as
marvelously efficient machines that reliably accomplished their goals. And in fact, bureaucracies did become
enormously successful, easily outcompeting other organization forms such as family businesses and
adhocracies. They also did much to introduce concepts of fairness and equality of opportunity into society,
having a profound effect on the social structure of nations.

However, bureaucracies are better for some tasks than others. In particular, bureaucracies are not well-suited to
industries in which technology changes rapidly or is not yet well-understood. Bureaucracies excel at businesses
involving routine tasks that can be well-specified in writing and don't change quickly.

Weber's Rational Bureaucracy

(this discussion based on the discussion in "The Organizational Age" by Rodney Stark in Sociology, 3rd Edition)

At the turn of the century a sociologist named Max Weber began to study the new forms of organization being
developed for managing large numbers of people in far-flung and complex activities. Since he was German, he
was very familiar with Moltke's development of the General Staff (see course packet material on 19th Century
Bureaucracies). Furthermore, Germany had been an early leader in developing a civil service. At the same time,
German industry was beginning to adopt the organizational methods developed in the United States. Surveying
this scene, Weber attempted to isolate the elements common to all of these new organizations.

Weber concluded that all these new large-scale organizations were similar. Each was a bureaucracy. Today
many of us regard bureaucracy as a dirty word, suggesting red tape, inefficiency, and officiousness As we shall
see, bureaucracies can develop these features, especially if authority is highly centralized. Weber's purpose,
however, was to define the essential features of new organizations and to indicate why these organizations
worked so much better than traditional ones. Let us examine the features that Weber found in bureaucracies.

Above all, Weber emphasized that bureaucratic organizations were an attempt to subdue human affairs to the
rule of reason-to make it possible to conduct the business of the organization "according to calculable rules."
For people who developed modern organizations, the purpose was to find rational solutions to the new problems
of size Weber saw bureaucracy as the rational product of social engineering, just as the machines of the
Industrial Revolution were the rational products of mechanical engineering. He wrote:
"The decisive reason for the advance of bureaucratic organization has always been its purely technical superiority over any former
organization. The fully developed bureaucratic mechanism compares with other organizations exactly as does the machine with non-
mechanical modes of production." [Weber, 1946].

For Weber the term bureaucracy was inseparable from the term rationality. And we may speak of his concept
as a "rational bureaucracy" But what were the features developed to make bureaucracies rational? We have
already met them: (1) functional specialization (2) clear lines of hierarchical authority, (3) expert training of
managers, and (4) decision making based on rules and tactics developed to guarantee consistent and effective
pursuit of organizational goals.

Weber noted additional features of rational bureaucracies that are simple extensions of the four just outlined, To
ensure expert management, appointment and promotion are based on merit rather than favoritism, and those
appointed treat their positions as full-time, primary careers.

To ensure order in decision making, business is conducted primarily through written rules records, and
communications.

Weber's idea of functional specialization applies both to persons within an organization and to relations between
larger units or divisions of the organization. We have already seen how this applied to Swift & Co. Within a
Swift packing plant, work was broken down into many special tasks, and employees were assigned to one or a
few such tasks, including the tasks involved in coordinating the work of others. (Such coordination is called
administration or management.) Furthermore, Swift was separated into a number of divisions, each specializing
in one of the tasks in the elaborate process of bringing meat from the ranch to the consumer. Weber argued that
such specialization is essential to a rational bureaucracy and that the specific boundaries separating one
functional division from another must be fixed by explicit rules, regulations, and procedures.

For Weber it was self-evident that coordinating the divisions of large organizations requires clear lines of
authority organized in a hierarchy. That means there are clear "levels of graded authority." All employees in the
organization must know who their boss is, and each person should always respect the chain of command; that is,
people should give orders only to their own subordinates and receive orders only through their own immediate
superior In this way, the people at the top can be sure that directives arrive where they are meant to go and
know where responsibilities lie.

Furthermore, hierarchical authority is required in bureaucracies so that highly trained experts can he properly
used as managers. It does little good to train someone to operate a stockyard, for example, and then have that
manager receive orders from someone whose training is in advertising. Rational bureaucracies can be operated,
Weber argued, only by deploying managers at all levels who have been selected and trained for their specific
jobs. Persons ticketed for top positions in bureaucracies are often rotated through many divisions of an
organization to gain firsthand experience of the many problems that their future subordinates must face. [Recall
how Moltke rotated his General Staff officers through various regiments.]

Finally, Weber stressed that rational bureaucracies must be managed in accordance with carefully developed
rules and principles that can be learned and applied and that transactions and decisions must be recorded so that
rules can he reviewed. Only with such rules and principles can the activities of hundreds of managers at
different levels in the organization be predicted and coordinated. If we cannot predict what others will do, then
we cannot count on them.

Moltke had to be sure that staff officers faced with an unexpected crisis would solve it as he would. To ensure
that, officers had to be trained in Moltke's tactical principles and rules. Similarly Gustavus Swift had to know
that his stockyards would not buy meat faster than his packing plants could process it or that more meat would
not be shipped than his eastern refrigerators could accommodate, of course, it is impossible to spell out detailed
rules to fit all contingencies. Therefore, decision makers must be highly trained and must report their decisions
promptly and accurately to their superiors.
For a long time, Weber's rational bureaucracy model dominated social science thinking about large, modern
organizations. If organizations did not operate quite as Weber had said a bureaucracy should, then the solution
was to bring them in line with the ideal bureaucratic procedures. However by World War II, sharp criticism of
Weber's ideas began to surface. social scientists began to argue that Weber had ignored much of what really
went on in organizations-the conflicts, the cliques, and the sidestepping of rules and the chain of command. The
problem, according to Philip Selznick 1948,1957), lay in the fact that bureaucracies were not and could not be
like machines because they consisted of human beings. In the final analysis, people will simply not imitate
machines.

Copyright ©1996 Stephen P. Borgatti Revised: Go to Home page

Matrix Organizations, What Are They?

Until the 1970's, typical, large organizations tended to function in "silos", logical divisions where essentially
isolated groups of workers reported to a line manager or functional manager. Imagine columns on a page with a
line manager at the top of each column and a group of workers inside each column under the manager.

As these groups operated autonomously, it was not unusual to find functions replicated in each silo.

In an Information Technology company for example, you might find software programmers in the development
area, some more in the customer support area, and yet more in the quality assurance area, because each of these
functional units had a programming need. If your organisation still operates in this manner, give your boss a
copy of this article.

And so it was in the 1970s that attempts to improve traditional organization structures, led to the creation of the
“Matrix" organizational structure.

In the matrix organisation, considering our IT example above, all programmers are now in a separate
programming department and report to a functional manager in charge of programming, and that manager
would control almost all of their work. In a matrix we usually refer to the line manager as a functional manager
because all of their workers perform similar functions.

So workers in a matrix organisation are compartmentalized by their required skills into silos, like columns in a
matrix, each with its dedicated manager. The workers report to and are responsible to their functional manager,
who in turn usually has sole responsibility for the advancement of their workers, as well as the administration of
their area, including budgeting.

So far the matrix organization sounds much like the traditional organization, except that all workers within a
silo (a column in the matrix) are partitioned by a particular skill-set.

The other difference between traditional organisations and matrix organisations is that matrices have rows (lines
running across the columns, not fights).

Traditional organizations operated quite well, but they were inefficient, with lots of duplication of skills around
the company. But their major weakness was when they tried to manage projects.

The problem was that in the traditional organisation, the concept of a project team, which is my nature cross-
functional, did not exist, because the project manager's "team" team comprised of people from different
functional areas, managed and controlled by different functional managers -- not by the project manager. And
this is not a recipe for successful projects.
So we have our columns of functionally similar workers in each column of our matrix, with a functional
manager at the head of each column. Now picture rows running across the page, with a project manager at the
"head" (i.e. the left hand side) of each row. The rows intersect the columns and so intersect the columns of
workers. So each row is a silo of workers of differing functionality, headed by a project manager. In such a
matrix structure there is an obvious tension between the project managers at the head of each row (each project)
and the managers at the head of each column (each functional area) as they are sharing the same workers, and as
each manager (project and functional) has a job to do, we have a conflict of interest.

There are different types of matrix organization, designed to balance the power struggle-struggle between the
managers conflicting needs. The main types are listed below.

The Weak Matrix

This type of organizational structure is a bit of a nightmare for Project Managers because they are effectively
reduced to being project facilitators. They make plans and monitor the execution, but they have no real
authority over staff, and are almost totally reliant upon the functional managers to provide resources.

The workers have little loyalty to the project managers (or the project), because it is the functional managers
who decide the advancement of the workers within the organization. And the workers' performance is usually
measured only on the work that they do for their functional manager -- not on their project work -- so in fact
working on a project may be seen by the worker as undesirable as they will have less time to do their regular
work, so the project manager may find them unmotivated.

And as the PM has no real authority over the team members, then they often have to report the problem of
workers not performing, to the functional managers in the hope that they will encourage the workers to work
more on the project.

But remember that the functional managers are primarily responsible for the performance of their own
functional areas, so their workers performing project tasks can actually reduce the productivity of their area
(often projects are ignored in the benchmarks). So this leads to a clear conflict of interest between the PM, the
functional managers and the various workers.

In this situation the PM usually loses -- and that’s the easy to remember it -- the PM is weak in a weak matrix.

The Strong Matrix

All these problems led to the creation of the “strong matrix” organization

In the strong matrix the tables are turned, it is the project managers that have responsibility for the workers, not
the line managers. But the PMs are not responsible for the human resource administration.

This empowers the project managers to manage the workers directly, and thus properly manage the whole
project, but without tying the PMs up in HR administration.

I have worked in organizations like this, where I managed my teams and was responsible for everything except
the HR functions, and I found it a very satisfying environment from a project point of view. So my teams would
have me as project manager and I had sole authority and responsibility to direct their work, but they also had
staff managers who looked after anything that was not project-related, i.e. performance reviews (but I provided
the key input to these) training, vacation administration, employment contracts etc. And this meant that I could
focus on the projects.

So when a project manager starts a new project, they discuss their staffing requirement with the functional
managers and the functional managers try to make the resources available (and provide training fro them, where
necessary). Usually the functional managers will draw up plans and charts (e.g. Gantt charts) of how “their
people” will fit inside projects, and they might move staff between projects and project managers as required
(after consulting with the project managers).

Effectively the PM and the functional managers work together, but overall control of everything project-related
is the function of the project manager -- so in a strong matrix, the project manager is the stronger party.

The Balanced Matrix

There is an old saying, “power corrupts, and absolute power corrupts absolutely”. In each type of matrix
organization there is a struggle for power, and so there needs to be some way to bring this into balance,
otherwise one group will dominate the other, to the detriment of the project, and ultimately to the detriment of
the organization as a whole (although individual projects or functional areas may blossom for a while). A very
dominant project manager for example may bully the functional managers into always giving them the best
team members for their projects.

One way of reducing the problem is to make rules within the organization that varies who can manage a worker,
depending upon certain circumstances. For example there could be a rule that says if an worker is to work on a
project for less than one week then the functional manager (or project manager) has sole control over the
worker, but if the requirement is for more than one week, control changes hands

Or there may be rules that the same worker can’t work for the same PM, on two consecutive projects.

There are many possible rules that could be made of course, but the goal is to balance the power between the
PM and the functional managers so that we don’t have a win/lose situation, and I’m sure you can guess that this
type of organizational structure is called a “balanced matrix”.
So weak, strong, or balanced, the "strength" is always from the viewpoint of the project manager.

Virtual/Network Organizations

Virtual Organizations

A firm that contracts out almost all functions. The only function retained by the organization is the name and
the coordination among the parties. A virtual organization might not have even have a permanent office.

Especially common in the fashion industry where you can have clothing labels that are just that. Say the label is
"John Taylor". The label has a clear identity in the public eye, but when you try to track down the John Taylor
company, you find there are no John Taylor designers, no John Taylor manufacturers. It's just 3 people in an
office subcontracting out all functions.

It is a network of firms held together by the product of the day. An open-ended system of ideas and activities
and firms.

Network Organizations

A network organization is a collection of autonomous firms or units that behave as a single larger entity, using
social mechanisms for coordination and control. The entities that make up a network organization are usually
legally independent entities (separate firms) but not always. Some of the entities may be wholly owned
subsidiaries. They can even be divisions within the company, but treated as separate companies that sell to
outside customers.
For the purpose of discussion, it is convenient to distinguish three types of network organizations: internal,
stable, and dynamic.

Internal Network

Large company that sees its units as separate profit centers. It may encourage the units to sell its products
outside the company as well (e.g., GM and its spark plug division). One reason for doing this is the belief that if
units have to operate with prices set by the market, they have incentive to improve performance and reduce
prices.

In these organizations, corporate headquarters acts like broker. A bit like role of government in business in
Japan.

Stable Network

The stable network consists of a central organization that outsources much of its operations to other companies.
For example, at BMW, they outsource about 65% of the total production cost of a car.

The central organization often has longterm relationships with suppliers, who have access to the company's
computer system and may be present at private planning sessions. The central organization may also have
several joint ventures, alliances, long term contracts, etc. going with different companies.

Dynamic Network

The dynamic networks outsource even more heavily. Basically, an integrator firm identifies and assembles
assets owned by other companies. Typically, the integrator is a downstream player whose core competence is
understanding the market. For example, Nike is the center of a dynamic network. Their only functions are R&D
and Marketing.

Dynamic networks are common in the fashion, toys, publishing, motion pictures, and biotech industries.

Market Networks

There may exist a fourth type of network organization, which we might call the "market network". These
organizations don't have a lead player that coordinates the others. Instead, a collection of organizations trading
in the market fall into a stable pattern of relationships that gradually becomes solidified. Initially, members of
the network may not be aware that they have fallen into this pattern. We can think of these organizations as
natural "subassemblies” of the economy.

Comparative Advantage of Network Organizations

The first question to ask is, What are the alternatives to network organizations? There are two basic alternatives:
vertically integrated firms, and the open market. How do firms decide what functions to perform in-house, and
which to purchase on the market? Why aren't all functions purchased on the market?

Transaction Cost Analysis

Think about a firm that makes a product based on a certain kind of computer memory chip. They buy the chips
on a recurring basis from a few different suppliers. Demand for these chips varies widely from time to time so
availability and prices are never givens. Also, there are wide variations in quality because the silicon wafer
technology has not yet solved some basic production problems. Every batch of chips purchased has to be
scrutinized carefully, and bad chips have to be sent back and replaced. The variations in availability and price
force the company to overbuy and then maintain warehouses full of supplies so that their assembly lines do not
have to be shut on and off with variations in the chip market. By maintaining a lot of inventory, they can buffer
their core technological processes, doling out the chips in a measured, reliable stream. The trouble is,
maintaining a lot of inventory is expensive, especially when the chips change over time and old chips are made
obsolete.

The problem is even worse when the company needs specialized chips from their suppliers, custom products
that they have designed themselves. Or, the other way around, each chip company does things differently, and
the manufacturer has to adapt their designs to specific chips (the way operating systems are built for specific
families of processors).

Under these conditions (frequent transactions, uncertainty of supply, and customization) organizations will elect
to bring the process in-house. That is, they will vertically integrate. The reason is that contracting with outsiders
under these conditions is costly. There are costs in maintaining inventories, costs in monitoring the exchanges
for malfeasance, costs in searching for suppliers, costs in specifying legal contracts, etc. Furthermore, because
they are working with this custom product, there are no other sources of supply that are ready-made. So they
could be charged a premium price.

In contrast, for functions that do not require frequent exchanges, that do not suffer from uncertainty of supply,
and which do not require customization, organizations will contract with outside firms, because it will be cheap
enough to do that. The costs of making and monitoring the transactions themselves will not be prohibitive,
which allows the organization to take advantage of hiring specialists to do the job. These specialist firms can
deliver a higher quality product, and can often do it more cheaply because of the volume they do. According to
economic theory, in a perfect competitive market, it is always better to hire out a function unless the transaction
costs make that too expensive.

What Conditions Favor Network Organizations

Network organizations are a blend of market and firm. They are halfway between vertical integration and
market disaggregation. The conditions that favor network organizations are:

Frequent transactions. Infrequent exchanges are best negotiated on the market.

Demand Uncertainty. Not to be confused with supply uncertainty. Demand uncertainty refers to the inability to
predict how well an organization's products will sell. For example, the film industry suffers from the inability to
predict which films will make it and which won't.

Customization. Also known as asset specificity, exchanges that involve individually customized products or
services.

Task Complexity. How complicated is the product being created.

Structural Embeddedness. The extent to which firms (and their members) are related to each other via a host of
ties, so that information about each other is always flowing. This helps to coordinate and control the firms.

As you can see, most of these conditions are the same as those favoring firms rather than markets. Network
organizations are more like firms than markets. But they occur in situations where demand uncertainty makes
vertically integrated firms a bad idea. When technology and markets are changing fast enough, it doesn't make
sense for a company to invest in a whole division because when things change they are stuck this whole
infrastructure that is now obsolete. So they decouple -- taking the highly volatile sections out. Yet, because of
all the other conditions, they need to maintain control, so they don't just hire it out on the market.
A network organization is like an ordinary firm which does not have a system of direct supervision, nor
standardized rules and procedures that apply throughout the firm. Consequently, they have to coordinate and
control the units in some other way. Some of the ways they do this are:

Joint payoffs. Networks are organized around specific products or projects. Payments for work are arranged
based on the final product, so that if the product doesn't make it, nobody gets any money. This provides
incentives for everyone to do their best.

Restricted access. By definition, network organizations do not hire just anybody on the market. Instead, they
restrict their exchanges to just a few longterm partners. This makes the organizations more dependent on each
other, so that their is more cost in defaulting. In addition, but increasing the probability of future exchanges, this
creates the conditions for avoiding a bad deal now so as to get future rewards. (If I take advantage of you on this
deal, I'll make out like a bandit, but I'll never get work from you again, so I forgo all that future money.)

Reputation. In the film industry, everyone talks to everybody. If someone is difficult to work with, or doesn't
pull their weight, everybody hears about it and it affects their ability to get future jobs.

Macroculture. The existence of a common industrial culture greases the wheels for coordination. Everybody
speaks the same language, has similar expectations and understandings of the task, so more can be implicit
rather than explicit.